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The decline of niche banks continues. Following the Silvergate failure is Silicon Valley Bank (SVB), which collapsed on March 10. After a failed attempt to raise capital, SBV has been taken over by the Federal Deposit Insurance Corporation (FDIC). The bank will be sold or liquidated.
In heavy trade on March 10, Signature Bank is on the rocks. It is down 21.11% at $69.65 at press time, but traded closer to $61 on the day before from its previous close of $90.76. As SVB did earlier this week, Signature is denying that it has any capital problems.
Although these banks are small, their impact on global markets is noticeable.
According to a recent disclosure, Circle has money with SVB, which only further complicates the ongoing stablecoin hoarding. Because SVB is now under FDIC control, the process of closing the bank or selling it off should be swift, but until that is done, Circle has frozen whatever reserves SVB has.
None of this bodes well for cryptos, which are both an emerging fintech and a volatile asset.
Cryptos have come under strong selling pressure, with bitcoin falling below $20,000 for the first time since January. There is no doubt that crypto markets are directly linked to capital flows in the traditional financial system, and in fact, crypto can be a leading indicator for the direction of risk assets in the wider world of finance.
sea of liquidity for some
Any market thrives or dies on its access to liquidity, and cryptos are no different. On March 10, John Wu, president of Ava Labs, said he thought the SVB failure was a bank run. He turned out to be right. SVB was not a risky bank, but as soon as a shark smells blood in the water, bad things can happen.
Legacy Many people in the financial markets either remember, or have learned about, the Lehman Brothers disaster of 2008. What many don’t remember is that the seeds of the crisis were sown a year ago, when BNP Paribas suspended trading in some of its funds.
The reason behind the suspension of trading was that BNP funds held subprime US mortgage bonds.
According to the bank, since these funds were largely illiquid, there was no market making mechanism to value them, and thus, they could not be valued. In the absence of a buyer, the value of the subprime bond was effectively zero.
Today, as smaller banks and riskier assets become harder to sell, there are many questions that remain in the market. Both Silvergate and SVB had huge exposure to both the technology and the startup. Assets in the tech startup and VC space, like the subprime mortgage bond market in 2008, are largely illiquid.
Shares of smaller companies are not traded with a market-making mechanism, and there is no centralized pricing exchange. In the crypto space, valuation problems abound. In most cases a token is not equity. As one analyst put it, tokens are like tickets to a carnival, not ownership of the carnival.
As liquidity evaporates, and a flight-to-quality trade emerges, this lack of equity could become an Achilles heel for the blockchain development space.
no-ownership culture
The idea behind bitcoin was decentralization, and as a result, many of the blockchains that exist today have no owners. You can use the platform, but you can’t own it in some way or the other. When times get tough, and liquidity dries up, it becomes difficult to raise money.
Some platforms have token reserves for this purpose, but many do not. When a company is in trouble and needs money, it can sell equity. While many people think of tokens like stocks, in most cases this is not the case.
Of course, there are companies in the blockchain space that have a corporate structure, but like most startups, they are smaller companies that hold private shares in the round of funding with venture capitalists, and these shares are typically illiquid investments. .
These private stocks are easy to sell when times are good, but in a rough market, like subprime bonds, they can be worthless.
A company that cannot take on debt, or sell equity, has to rely on revenue to fund its operations. For many early-stage tech companies, this isn’t an option. In the worst case, the emerging tech sector could explode, and the IP generated would be dumped on the market at fire sale prices.
What does the abyss look like?
There is no organic liquidity in the blockchain space from a fiat perspective.
Fiat money flows into crypto and blockchain in two main channels. Either it comes from retail investors, or from institutional investors. While more people are willing to accept crypto as a means of payment all the time, as prices decline in fiat terms, this trade becomes less attractive from a fiat perspective.
Institutional investors who have embraced bitcoin, such as MicroStrategy’s Michael Saylor, have faced dire consequences. Then there’s the reputational risk that cryptos present to institutional investors. If an industry leader like Charlie Munger or Jamie Dimon finds out that a CEO is into bitcoin, it could result in difficulties.
The last time bitcoin and crypto faced a prolonged bear market, it was a different industry. PayPal was holding anyone who held crypto, and the idea that major banks would offer crypto custody services was absurd.
Now looking for good deals with big bucks. Smart Money bought Apple Computer for $2 a share after the dot-com collapse. That same smart money will be looking for distressed assets in 2023, and given market conditions, that money will be spoiled for choice.
About the Author: Nicholas Say is News Editor at Crypto.News. Starting her working life in the visual arts, she loves to write. Nichols thinks words pack more power than images, and are far more accurate. Given a choice between dogs and cats, Nicholas prefers dogs, but not by a wide margin. He has worked in a writing or editing capacity at several companies including Blockonomi and Grit Daily. When he is not working, Nicolas loves to cook.
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